Independent Contractor Determination and Payment Procedures

Independent contractor payments may be processed for qualifying individuals providing services to the University. The responsibility for determining if the individual providing the service should be classified as an independent contractor or an employee rests with the department submitting the payment request. Clarification on independent contractor or employee status may be obtained from the Director of Human Resources.  

It is critical that the University comply with State and Federal laws governing reportable/taxable income and the proper classification of employees and independent contractors. Misclassification of a worker as an independent contractor can result in serious financial penalties in a State or Federal audit. The hiring department will be financially responsible for any employment taxes, penalties and interest, should an independent contractor they hired be determined at a later date by any auditing authority to be more correctly classified as an employee.

Review of the limitations, determining factors, and instructions provided herein must be completed by the department PRIOR to hiring any individual as an independent contractor. Failure to do so could result in a request for payment to be denied should the individual hired not qualify as an independent contractor.

 

• Instructions
• Limitations/Restrictions
• Independent Contractor or Employee?
• 23 Determination Factors
• Independent Contractor Invoice
• Payee Data Record Form (STD 204)
• Payment Timeframe
• Reportable Payments
• Who to contact

 

Instructions:

• Determine prior to hiring the individual to perform services if the individual can be classified as an independent contractor. The department (more specifically, the University manager/designee supervising the services) must review both the Limitations/Restrictions and the 23 Determination Factors to ensure the individual can be classified as an independent contractor.

 

If the department is unable to determine an individual’s independent contractor/employee status, the department is encouraged to contact the Director of Human Resources for assistance at x75138. If after consulting with the Human Resources Director, a determination still cannot be made, contact the Accounts Payable Manager at x75155 for additional sources to contact for assistance.

 

• Prepare the Independent Contractor Invoice as soon as possible, a minimum of three weeks before the scheduled service. The department must obtain the independent contractor’s original signature on the invoice form PRIOR to the provision of service, as the Independent Contractor Invoice includes a waiver of liability that the independent contractor is required to sign before service is allowed to commence. If the independent contractor fails or refuses to sign this waiver, the department cannot allow the contractor to provide services. Payment will not be issued for any independent contractor not signing the Independent Contractor Invoice form.

• A Payee Data Record form (STD 204) must be completed by the independent contractor before payment can be issued. Payee Data Record forms are mandatory for all vendors paid by the University. If you believe this individual has performed independent contractor services for the University previously, you may contact Accounts Payable at x75155 to inquire if a Payee Data Record for this individual is already on file.

• Once service has been provided, the University manager/designee supervising the service must sign off on the Independent Contractor Invoice and forward this form, along with the Payee Data Record and Purchasing/Contract Approval form (if applicable), to Accounts Payable for payment processing.

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Limitations/Restrictions:

• Individuals working for or owning a business, to which payments will be issued to the business name, must be processed through the Purchasing Department. Please submit an online requisition to Purchasing identifying the vendor name, services to be provided, date of service, amount to be paid, etc.

 

• If a department is planning on hiring and paying an independent contractor (individual) for a total of more than $10,000.00 (ten thousand) during any one fiscal year (July 1 through June 30), the department MUST contact Purchasing at x75142 PRIOR to making any commitment to hire. Purchasing will require certain documentation BEFORE approval is granted to hire.

 

• If an independent contractor has submitted their contract to you for signature, do not sign the contract. You are not authorized to enter into a contractual agreement on behalf of the University. Only a University contracting officer is authorized to sign contracts. Contact Purchasing at x75142 for further instructions.

 

• If the independent contractor (individual or company) is a non-resident alien (NRA), or if you are unsure of the residency status* of the independent contractor, please contact Maria Badulis, NRA Accountant, at x73988 PRIOR to hiring the individual. Accounting MUST verify residency status and/or Visa status prior to a department making a commitment to hire. Failure to do so may result in the university being unable to legally hire and pay the independent contractor.

 

*(Meaning you do not know for a fact if the independent contractor is not a citizen of the United States or in possession of a Green Card.)

 

• It has been the policy of this campus, since January 1, 1997, not to hire as an independent contractor any current employee of the CSU system (including the Chancellor’s Office, any CSU campus or any CSU auxiliary), or former employee who has worked for the CSU within the calendar year. These individuals must be paid as employees for their services.

 

Per HR 2003-21, additional restrictions became effective January 1, 2004:

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• Senate Bill 41 – CSU Contract Restrictions

 

Restriction 1: A CSU employee, except for those employees with teaching or research responsibilities, may not “contract on his or her individual behalf as an independent contractor with any California State University department to provide services or goods.” (PCC 10831)

 

Restriction 2: A CSU employee, except for those employees with teaching or research responsibilities, may not engage in any employment or activity for which the employee receives compensation through or by a CSU contract, unless the employment or activity is within the course and scope of the employee’s regular CSU employment. (PCC 10831)

 

Restriction 3: For two years following retirement or separation from CSU employment, no former employee may enter into a contract “in which he or she engaged in any of the negotiations, transactions, planning, arrangements, or any part of the decision-making process relevant to the contract while employed in any capacity by any CSU department.” (PCC 10832 (a))

 

Restriction 4: For 12 months following retirement or separation from CSU, no former employee may contract with the CSU if he or she were employed by the CSU “in a policymaking position in the same general subject area as the proposed contract within the 12-month period prior to his or her retirement…or separation.” Excepted are contracts for expert witness services and contracts to continue attorney services. (PCC Section 10411(b) made applicable to CSU by PCC 10832(b))

 

Please direct questions regarding the restrictions imposed by Senate Bill 41 and for information regarding the proper procedures to pay individuals as employees to the Human Resources Director at x75138.

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What is an independent contractor?

General definition:

An independent contractor is engaged in a distinct profession and is in the business of providing services related to the job being contracted. Independent contractors have total control over the work being performed, set their own hours, pay for their own business expenses, provide their own equipment, liability insurance, and office space.

 

Independent Contractor or Employee? – From IRS Publication 1779 (Rev. 12-99)

The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These relevant facts fall into three main categories: behavioral control; financial control; and relationship of the parties. In each case, it is very important to consider all the facts – no single fact provides the answer. Carefully review the following definitions.

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Behavioral Control

These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work. For example:

 

• Instructions – if you receive extensive instructions on how work is to be done, this suggests that you are an employee. Instructions can cover a wide rage of topics, for example:

 

• How, when and where to do the work
• What tools or equipment to use
• What assistants to hire to help with the work
• Where to purchase supplies and services

 

If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.

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Financial Control

These facts show whether there is a right to direct or control the business part of the work. For example:

• Significant Investment – if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
• Expenses – if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
• Opportunity for Profit or Loss – if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

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Relationship of the Parties

These are facts that illustrate how the business and the worker perceive their relationship. For example:

• Employee Benefits – if you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
• Written Contracts – a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

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23 Determination Factors

The U.S. Internal Revenue Code requires the presence of specific characteristics between the employer and the contractual provider of personal/professional services before an Independent Contractor relationship can exist. Before any performance of services, campus departments contracting for personal/professional services must assess the relationship with the individual provider to ensure that the individual is properly classified. An independent contractor is defined as an individual over whom the employer has the right to control or direct only the result of the work, and not the means and methods of accomplishing the result.

The Internal Revenue Service (IRS) has established 20 guidelines to help employers determine whether a worker should be treated as an employee or an independent contractor for tax purposes. Those 20 guidelines* are:

1. Instructions:

• Employees comply with their employer’s instructions about when, where, and how to work, or the employer has the right to control how a worker’s results are achieved.
• Independent Contractors have more flexibility.

2. Training:

• Employees may receive training from their employers to perform services in a particular manner.
• Independent contractors usually use their own work methods and receive no training from those purchasing their services.

3. Integration:

• Employees’ services are usually integrated into the business’s operations because they are key to the success or the continuation of the business.
• Independent contactors are independent of the business’s operation.

4. Services Rendered Personally:

• Employees render services personally.
• Independent contractors render services as contractors.

5. Hiring Assistants:

• Employees work for an employer.
• Independent contractors can hire, supervise and pay assistants under a contract that requires them to provide materials and labor and to be responsible for the results.

6. Continuing Relationship:

• Employees generally have ongoing relationships with their employers.
• Independent contractors’ relationships will usually be more sporadic.

7. Set Hours of Work:

• Employers usually set their employees’ work hours.
• Independent contractors usually set their own hours.

8. Full-Time Required:

• Employees may be required to work or to be available full-time.
• Independent contractors may work when and for whom they choose.

9. Work Done on Premises:

• Employees usually work on their employers’ premises or on a route or at a location approved by their employers.
• Independent contractors may work away from the employers’ premises when it could be done at the employers’ premises.

10. Order or Sequence Set:

• Employees may be required to perform services in the order or sequence set by their employers.
• Independent contractors can establish their own sequence.

11. Reports:

• Employees may be required to submit reports to their employers.
• Independent contractors are not required to submit reports to their clients.

(However, reports related only to the end result is not an indication of employment or independence.)

12. Payments:

• Employees are paid by the hour, week, or month.
• Independent contractors are usually paid by the job or through a commission.

13. Expenses:

• The business and travel expenses of employees are generally paid by their employers.
• Independent contractors are responsible for paying their own expenses.

14. Tools and Materials:

• Employers normally furnish their employees with the key tools, materials, and other materials they need to do their jobs.
• Independent contractors normally furnish their own tools and materials.

15. Investment:

• Employees normally do not invest in the facilities (generally, equipment and premises).
• Independent contractors have a significant investment in the facilities they use to perform services for someone else.

16. Profit and Loss:

• Employees do not experience a profit or loss.
• Independent contractors can experience a profit or loss.

17. Works for More Than One Person or Firm:

• Employees usually work for one firm at a time.
• Independent contractors may work for multiple persons or firms at the same time.

18. Offer Services to the General Public:

• Employees usually work for one employer.
• Independent contractors make their services available to whomever they want.

19. Right to Fire:

• Employees can be fired by their employers.
• Independent contractors cannot be fired as long as they produce a result that meets the specifications of their contract.

20. Right to Quit:

• Employees have the right to quit a job any time without incurring liability.
• Independent contractors usually agree to carry out specific tasks or series of tasks and are responsible for completing those tasks satisfactorily, or are legally obligated to make good for failing to do so.

*The resource for the present version of the above 20 factors is © 1994 by John Ventura, and is excerpted from “The Small Business Survival Kit” published by Dearborn Financial Publishing Inc., Chicago, IL.

Additional Independent contractor/employee determination factors (common law) for State employment tax purposes:

21. Custom in Industry and Location:

• If the work is traditionally done by civil service employees in Sacramento under the direction of a supervisor it is an indication of employment.
• If the work is usually done by independent contractors in Sacramento, it is an indication of independence.

22. Required Level of Skill:

• A low level of technical skill is strong evidence of employment, since as the skill level declines there is less room to exercise the discretion necessary for independence.
• A high level of technical skill is important when combined with other factors such as owning a separate and distinct business.

23. Belief of Parties:

• It is an indication of employment if both the worker and the State believe the relationship is employment or if either party believes that the relationship is employment.
• If all parties agree that the relationship is one of independence, it may be. However, consideration should be given to the fact that many individuals do not know how to an employee determination is made, and believe they are an independent contractor because they were told they are.

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Payment Timeframe

• If Accounts Payable receives all required properly completed documentation, payment will be processed within two weeks or less and mailed to the independent contractor. Payment for services is made in arrears as required by the State.

• Departments may submit the Independent Contractor Invoice to Accounts Payable in advance of the service date. If properly completed documentation is received by Accounts Payable a minimum of two weeks in advance, Accounts Payable will review and enter the payment request for the check to issue the next regular check day after the date of service. It is the responsibility of the department to immediately contact Accounts Payable with instructions to hold the check from mailing, if the service is not provided as agreed upon.

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Reportable Payments:

• Accounts Payable will retain the Payee Data Record form on file for audit purposes as required by the State.

 

• Accounts Payable will issue Form 1099, as required by law, to any independent contractor receiving payment(s) from the University totaling more than $600.00 within a calendar year.

 

• If the independent contractor is a non-resident of California, tax must be withheld if payment exceeds or will exceed $1,500.00 within a calendar year. Withholding will occur at a rate of 7%. Franchise Tax Board Form 592 will be issued to independent contractors for whom State tax withholding has occurred.

 

• Non-resident alien (NRA, aka foreign) independent contractors are handled on a case-by-case basis, as visa status and specific country treaties must be taken into account to determine tax withholding percentages. If you have a possible NRA independent contractor you are considering hiring, please contact Maria Badulis at x73988.

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Who to contact for assistance:

Accounts Payable x75155 –

• Independent Contractor procedures
• The Independent Contractor Invoice and its completion
• The Payee Data Record form and its completion
• Purchasing/Contract Approval form
• Payment status
• Form 1099-MISC information
• Form 592 and State withholding information

Maria Badulis, NRA Accountant x73988 –

• Non-Resident Alien or foreign independent contractors
• Form 1042S information

Dale West, Human Resources Director x75138 –

• HR 2003-21 (Senate Bill 41)
• Clarification on employee vs. independent contractor

 

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